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International labour mobility for resilience building in microstates

International labour mobility for resilience building in microstates. Satish Chand The Australian National University Canberra. Abstract. The question :

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International labour mobility for resilience building in microstates

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  1. International labour mobility for resilience building in microstates Satish Chand The Australian National University Canberra

  2. Abstract The question: Does access to foreign labour markets reduce vulnerability to domestic macroeconomic shocks in microstates? In other words, can access to foreign labour markets serve as an instrument for resilience building in microstates? The answer, according to research results presented in this paper, is in the affirmative. A simple conceptual framework together with data from 34 microstates, that is those with a population of less than a million, is used to show that the 8 microstates with access to foreign labour markets have experienced lower consumption volatility compared to the rest.

  3. Outline of presentation • Motivation for this work • The literature on remittances and resilience building • The model • Empirics • Some policy implications • Conclusions

  4. Macroeconomic challenge • Macroeconomic challenge is to reduce volatility in utility in the face continuous macroeconomic shocks • The capacity to use of active stabilisation in microstates is limited since • Open capital account with a fixed exchange rate limits use of monetary policy • Use of fiscal policy limited by the capacity to fund deficits • Macro-shocks, thus, have real effects! L-mobility provides one means of ameliorating the effects

  5. Consumption variability – L.1 See Figures 1, 2, and 3

  6. Remittances for resilience building • Remittance flows are more stable than FDI (IMF, 2005) • Recent literature investigates the correlation between remittance flows with business cycles • Remittances being pro-cyclical is interpreted as being motivated by self-interest while the converse is read as being driven by altruism. • These interpretations, in my view, are flawed. • Better to look at the impact of labour mobility on consumption volatility.

  7. The model Utility: SR-production function: Current A\C balance: Employment: Utility: Consn volatility:

  8. Empirics • Data – panel comprising 34 microstates for period 1950-2003 on c, y, p from PWT (6.2) & CIA-Factbook • Test order of integration for all data – see table 4 • Model estimated of the form:

  9. Results • Estimate for the constant term, 0 > 0, and statistically significant, in the case without labour mobility ONLY • Estimate of 1 = 0.758 for microstates without access to foreign labour markets versus 1 = 0.923 for those with L-Access • Above findings hold for differenced data except for one-year lags • Caution – mixed evidence of I(0) error terms in the levels estimates.

  10. Augmented model • Access to foreign labour markets increases the mpc by 17 percentage points whilst lowering the overall level of volatility by 1.4 percentage point

  11. Conclusions • Access to foreign labour markets by microstates reduces consumption volatility • Such access, therefore, can be an instrument for resilience building in microstates • A bonus of such access from low-income microstates is that it provides headroom to undertake reforms that may raise unemployment in the short term (e.g. CI vs Vanuatu) • Value-add of this paper – new methodology (re IMF studies) and exclusive focus on microstates • Next step – extend the analysis to micro-level empirics.

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